Estate planning is important for everyone. However, certain situations call for strategies that go beyond typical estate plans.
Often, these strategies come in the form of one or more irrevocable living trusts. If you’re concerned about potentially owing estate taxes, for example, you may want to consider an irrevocable life insurance trust in Texas.
Take a closer look at what an irrevocable life insurance trust (ILIT) involves and how an estate planning attorney can help determine whether creating one is the right choice for you.
How Irrevocable Life Insurance Trusts Work
Before evaluating its worth as a tool in your estate plan, it’s essential to first understand how an ILIT works. Key aspects of an ILIT include:
- You move assets into a trust
- A trustee uses trust assets to purchase a life insurance policy
- When you die, the insurance payout goes directly to the trust
- The policy proceeds are then distributed to trust beneficiaries
If you have a sizable estate, moving certain assets may help you avoid liability for estate taxes. As of 2025, the gift and estate tax exemption is $13.99 million, which means that you will typically pay estate taxes on any funds exceeding the exemption. Because an ILIT is irrevocable, meaning you can’t change it, the assets you transfer are no longer part of your estate.
When you set up an ILIT and fund it, you must appoint a trustee to purchase a life insurance policy in your name. The trustee ensures that the premium payments are made on time so that the life insurance policy stays current.
Just like with other kinds of life insurance trusts, your life insurance policy pays out directly to the trust — not to your heirs. The trust then distributes the proceeds to those you have named as beneficiaries.
Irrevocable life insurance trusts are valuable estate planning tools, but they aren’t right for everyone. Before making your decision, you’ll want to ensure you know the difference between an ILIT vs. revocable trust.
Many people are hesitant to create an irrevocable trust because they don’t have the option to change it later. In certain situations, beneficiaries and trustees may be able to amend an irrevocable trust, but revocable trusts are generally more flexible because the grantor, or the creator of the trust, can modify or dissolve them at any time.
It’s important to note, though, that because revocable trusts are so flexible, they generally don’t come with the same tax advantages as ILITs and other irrevocable trusts.
Benefits of an Irrevocable Life Insurance Trust
Depending on your estate planning goals, an ILIT may offer you and your family several benefits.
Lowering Your Estate Tax Liabilities
Most people who create ILITs do so for the tax benefits. You might be worried about exceeding lifetime estate tax exemptions, for instance. The top estate tax bracket is 40%, meaning estate taxes can potentially reduce what your heirs receive by a considerable amount.
Transferring assets to an irrevocable life insurance trust reduces your taxable estate. Texas doesn’t impose state estate taxes, so if you can keep your estate under the $13.99 million federal exemption, you usually won’t owe estate tax at all.
Reducing Your Current Tax Liabilities
Many people emphasize the ability of ILITs to minimize estate taxes. However, these trusts can also help minimize your current tax burden.
Because ILITs are irrevocable, transferring ownership of assets means those assets no longer belong to you. They belong to the trust, which is a separate legal entity. This means you won’t pay taxes on assets given to the trust.
Protecting Assets From Creditors
When you’re thinking about creating an irrevocable trust, creditor protection in Texas is often a major concern. Unlike a revocable life insurance trust, an ILIT offers asset protection benefits.
In nearly every case, creditors may not lay claim to assets held in the trust — or the life insurance payouts given to your beneficiaries. ILITs can also protect assets from divorce settlements.
Safeguarding Your Beneficiaries’ Access to Government Benefits
Some grantors set up irrevocable life insurance trusts to ensure family members with disabilities will be provided for. But if a beneficiary exceeds the asset limits for government benefits, they may lose eligibility.
Your estate planning attorney can help you ensure that distributions from your ILIT won’t interfere with your loved one’s eligibility for Medicaid and other programs.
Who Should Set Up an ILIT?
An ILIT may be beneficial if there is a risk of exceeding the current estate tax exemption of $13.99 million. If you could potentially owe estate tax, you may benefit from creating an ILIT. If you don’t need to worry about minimizing estate taxes, another estate planning tool may be a better fit.
Some tax situations are less clear-cut than others. If you aren’t sure whether an ILIT is the right fit for you and your family, make sure to consult an estate planning lawyer.
Setting Up an Irrevocable Life Insurance Trust
Wondering how to fund an ILIT? Once you’ve determined that an irrevocable life insurance trust is the right option for you, the next step is funding it. You may transfer an existing life insurance policy to the trust or create a new policy.
You then must determine how to pay for the premiums. Typically, you have two main options for doing so: transferring assets to the trust or using your annual gift tax exclusion to pay premiums.
In many cases, the second option is the most tax-efficient. The annual gift tax exclusion is the maximum amount you may transfer to a single beneficiary without impacting your lifetime gift and estate tax exemption.
For 2025, the annual gift tax exclusion is $19,000. When you gift the total premium amount of up to $19,000 to the trust’s checking account, you can reduce the total value of your taxable estate.
Setting up the trust itself is important, but so is selecting your trustee. ILIT trustee responsibilities include ensuring policy premiums are paid and overseeing the distribution of life insurance benefits among beneficiaries.
As the grantor of the trust and the insured person on the life insurance policy, you may not serve as the trustee. Some grantors name a family member as an ILIT trustee, but in general, it’s better to choose a professional trustee.
The “Crummey” Letter and Funding
To continue reducing the value of your taxable estate and ensuring there is enough money to pay the premiums on your life insurance policy, you might periodically make a gift to your ILIT. Before you do so, though, you need to understand the importance of the ILIT Crummey letter in Texas.
Crummey letters may sound like a formality. But if you don’t send them each time you make a gift to the trust, you might end up paying unexpected gift taxes.
A Crummey letter is a notice sent to all trust beneficiaries each time you make a gift to the trust. The letter informs beneficiaries of their right to make a withdrawal. Your estate planning attorney can help make sure your Crummey letters meet all legal requirements, but generally, these letters must include the following:
- A notification that you made a gift to the ILIT
- The amount of the gift that the beneficiary has a right to withdraw
- How much time the beneficiary has to make a withdrawal
- A request for the beneficiary to notify the trustee if they want to make a withdrawal
You might wonder why these letters are so important. For the money you put into the trust to be considered a gift, the beneficiaries must have a present interest in the amount given. By offering your beneficiaries the temporary right to withdraw money, you create a present interest — and solidify your eligibility for the annual gift tax exemption.
Modifying or Terminating an ILIT
Modifying an irrevocable trust in Texas can be difficult and complex, but in certain situations, it’s possible. In some instances, the terms of the trust might allow you to name a new trustee. In almost every other case, the trust may not be modified or terminated without the consent of each trust beneficiary, the involvement of the court, or both.
Before you create an irrevocable life insurance trust, you should keep in mind that these trusts can seldom be changed after creation. If modification or termination is possible, it may involve a long and expensive process.
You should never assume that you and your beneficiaries will be able to change the trust, so consulting a financial professional and estate planning attorney beforehand is wise.
Understanding the Tax Advantages of ILITs
When most people decide to open an ILIT, estate tax exemptions are one of the primary deciding factors. However, your ILIT provides tax advantages beyond minimizing your estate taxes.
Life Insurance Proceeds Won’t Be Taxable
Death benefits from life insurance policies aren’t usually subject to income tax. Still, many people don’t realize that, like other estate assets, they’re subject to estate tax. By transferring your life insurance policy to a trust, you exclude the death benefits from your estate.
The Policy’s Death Benefit May Be Used to Pay Estate Taxes
For some people, ILITs and other estate planning tools can eliminate estate taxes altogether. For those with very large estates, there may still be some tax liability.
Many people establish ILITs to distribute the proceeds directly to heirs. Upon the insured’s death, though, the proceeds may also be used to pay estate taxes. This can eliminate the need to sell off estate assets to pay taxes.
Premium Payments Might Qualify for the Annual Gift Tax Exclusion
If you anticipate having to pay estate taxes after death, you might choose to reduce the value of your estate over your lifetime. However, the $13.99 million lifetime exemption applies to both monetary gifts and the value of your estate. The annual gift tax exclusion allows you to make gifts under a certain amount that don’t count toward the lifetime limit.
If you carefully plan to make gifts to the trust and ask the trustee to apply them to the premium payments, you can cover an essential expense while also reducing the estate taxes you may owe.
Preserving Eligibility for Government Assistance Through ILITs
Many people don’t take the connection between life insurance trusts and Medicaid planning into account. If your estate is large enough that you need to create an ILIT, you’re unlikely to qualify for Medicaid benefits yourself. Some of your beneficiaries might, though, and if you gift them a lump sum, you may unwittingly change a beneficiary’s eligibility.
Medicaid and many other kinds of government assistance are means-tested, so if someone exceeds the asset limit, they may be disqualified. Gifting a loved one a large lump sum can easily cause them to exceed the asset limit.
With an ILIT, you can control how the life insurance proceeds are distributed. By spreading out payments over time, you can ensure that your loved one can still receive the support they need.
The ILIT “3-Year Rule” Explained
When you create an ILIT, you may either buy a new life insurance policy or transfer an existing policy. If you choose the latter, you must be aware of a key consideration: the ILIT “3-year rule.”
This rule is relatively straightforward. If you transfer an existing life insurance policy to an ILIT, you must survive the transfer by three years. If you die before three years have passed, the proceeds from the policy will be included in your estate and will therefore be potentially taxable.
Because unexpected death is always a possibility, buying a new policy may prove to be the financially sound choice.
When to Set Up an ILIT in Texas: Timing and Practical Steps
Your ILIT can include term life insurance policies, or those that last a set number of years, and whole life insurance policies, which last your entire life. Because you must outlive a transferred life insurance policy by three years, it’s best to open a new policy when creating the trust if possible.
To ensure the three-year rule doesn’t apply, you should establish the ILIT before you take out your life insurance policy. But when should you take out a life insurance policy? Generally, it’s wise to do so if you have children or a dependent spouse.
Purchasing a policy while relatively young can help control the cost of your premiums. Choosing life insurance — especially when you’re using it to fund an ILIT — can be complex, so it’s best to consult a financial professional before doing so.
Using ILITs to Strengthen Multi-Generational Wealth Plans
An irrevocable life insurance trust in Texas can be set up to benefit multiple generations. If you set up your ILIT as a dynasty trust, you can secure your family’s financial future while keeping estate, transfer, and generation-skipping transfer taxes to a minimum. Dynasty trusts can last for 100 years or more.
If you intend for your wealth to be transferred to multiple generations, you might choose to allocate certain assets as part of your generation-skipping transfer tax exemption. Transfers to those two or more generations after you can incur significant taxes, but the right planning can keep those taxes to a minimum. The more taxes you can avoid, the more of your wealth stays in the family.
Need Help Setting Up an Irrevocable Life Insurance Trust in Texas?
Texas life insurance trust planning can be overwhelming. Opening an ILIT is a far more involved process than simply taking out a life insurance policy, and if you want to minimize your federal estate taxes and avoid gift taxes, you must make sure the trust meets all applicable regulations.
At Hunter Sargent, PLLC, we’ve helped families like yours successfully navigate federal and Texas estate tax laws for more than seven generations. If you’re ready to create your estate plan or update your existing one, get in touch to schedule your consultation today.